Tax Relief for Intellectual Property and R&D
Innovation Tax Relief
The Government’s Innovation and Research Strategy for Growth is as follows:
“Innovation is the development of new products, services and processes, which may
be based on cutting edge research. Improving the UK’s innovation performance is an
essential component of the Government’s growth plan.
“A large body of evidence shows that innovative economies are more productive and
faster growing. They deliver higher returns on investment and increased living
standards. They are better at responding to changing circumstances through
redeploying old activities and jobs. They are more able to find solutions to global
challenges such as reducing dependence on fossil fuels, helping people live longer
and healthier lives.
“UK businesses have to invest more in innovation activities to grow. Innovative
businesses grow twice as fast, both in employment and sales, as businesses that fail
“Innovation will drive the competitiveness of our businesses in the global economy. In
technology-based sectors, research is a primary driver of innovation, and research can
also discover and exploit new technologies, sometimes giving rise to new industries.
In other sectors the rapid adoption of technologies and the development of intangible
assets are essential to innovate, sometimes transforming existing industries.”
The UK Government is very serious about innovation and this is reflected in their tax policy and legislation as there are some fantastic reliefs available:
R&D tax relief and credits
R&D tax relief was introduced a number of years ago but has become increasingly generous. There are two schemes, one for small and medium sized enterprises (SME) and another for larger enterprises.
An SME is a company/group with fewer than 500 employees and either a turnover not exceeding €100m or a balance sheet not exceeding €86m (technically, this is the upper limit for medium sized enterprises). The benefit to the SME arrangement is that a 225% tax deduction for qualifying expenditure is available and if the company has a tax loss in the year it can, subject to certain limits, be exchanged for cash from HMRC. The amount of cash is 14% of the losses exchanged. However when taken with the 225% enhanced relief this works out at £31.50 for every £100 of qualifying spend on R&D.
The large scheme entitles a company to either a 130% deduction for relevant R&D expenditure or a 10% above the line tax credit. There is some choice over this at the moment but the 130% deduction is being phased out.
There are broadly two halves to an R&D claim. The first is identifying whether you have a qualifying project and presenting this to HMRC. The second is identifying the relevant costs.
For a project to qualify it must seek an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. This is a complex way of saying that if there is a technical or scientific problem that is not easily resolved then you have to come up with a relatively unique way of solving it. It does not need to be completely unique, in that other people can also be working on the same problem (so long as the solution is not publicly available) and it does not need to succeed. It does, however, have to be undertaken for the purposes of your company’s trade.
It is then a matter of identifying the qualifying costs. These include:
- Staff costs of those staff of the company directly and indirectly involved in the R&D project. This includes salary, employers NIC and pension contributions, though not benefits.
- The costs incurred on agency staff and staff from other group companies provided certain conditions are met
- Any consumable or transformable materials used in the R&D project
- A portion of utility costs.
- Any computer software directly used in the R&D project
- Subcontractor costs if you have sub contracted out any aspect of the R&D, though you can only claim 65% of these. These are excluded from the “large” company scheme.
There is also relief available for capital expenditure through what are known as Research and Development Allowances (RDAs). The relief here is a 100% deduction for the capital expenditure in the year in which it is occurred. However it can extend to capital expenditure that you would not normally get tax relief for.
One other point to note is that the R&D project you are claiming for cannot have been subsidised at any time by grants, otherwise you can’t claim under the SME arrangement. Grants for other expenditure are allowed, it is R&D specific ones that you need to be aware of.
R&D is everywhere. Alexander & Co have been involved with successful claims covering software, new inventions, add ons to existing machines, new/altered methods of manufacture, bespoke computer systems for all sorts of businesses, body armour, new food types, product development, testing equipment, food products – the list goes on. You just need to do a little thinking outside the box.
A more recently introduced relief is the patent box. The very real benefit to the patent box is that, if your company qualifies, the rate of corporation tax paid on patent box profits is 10% not 20%. This is potentially a very large saving.
To qualify, a UK or European patent (there are a few other types of patent that qualify) or an exclusive licence to such a patent is required. It can be over an invention, part of the manufacturing process, the product you produce or even a part of that product. So long as there is a patented element, the patent box and the potential tax savings could apply.
The biggest barrier for many companies is the perceived cost of obtaining a patent. Having discussed the matter with a longstanding Patent Attorney firm it appears that applications for UK patents can be more effective than you might imagine and although patent box cannot be claimed until such time as you have a patent or exclusive licence, you can backdate it to cover the patent box profits arising from the date of application.
As with all good tax reliefs the legislation is complicated so as to prevent abuse; however a good accountant will be able to navigate this for you and help your company take advantage of these generous reliefs.